GST on Underwriting

Facts

First party is a builder
Second party enter into an underwriting arrangement to sell builder’s property before construction completion (Before local government agency issues occupancy or completion certificate to builder)
Second party gives a security deposit to first party amounting to the agreed sale price of property
In case the second party is not able to sell the property within the agreed period, the security deposit given by him will be adjusted and property will be sold to him.
First party is also giving a minimal rental guarantee to second party on the property under subject

Whether the said transaction of giving underwriting security deposit falls under purview of GST.

Situation and analysis under law

Sale of building is an activity or consideration which is neither a supply of goods nor a supply of services (Para 5 of schedule III of the CGST Act, 2017). Thus, sale of ready-to-move-in or completed property does not attract GST. GST is payable only on under construction property as discussed below.

Consideration has been paid to the builder after 1^st July, 2017

As per GST law, Construction of a Complex, Building, Civil structure or a part thereof, including a complex or building intended for Sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority of after its first occupation, whichever is earlier, is a supply of service and liable to GST as per Para 5(b) of Schedule II of CGST Act.

Further, as per definition of supply under CGST, supply includes all forms of supply of goods and services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. It further includes

“agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” (Para 5(e) of Schedule II of the CGT Act)
“transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration” (Para 5(f) of Schedule II of the CGT Act)

The Black’s law dictionary defines ‘transfer’ as follows:

Transfer means every mode, direct, absolute or conditional, voluntary or involuntary, of disposing of or parting with property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption.

The proposed transaction is meeting one or more conditions above as the agreement refrain the builder for sale of property on his own account and the transfer may also get transferred in the name of second party in future.

Value of Taxable supply

As per Section 15, the value of supply of goods or services or both shall be transaction value, which is the pre actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. The Rule 27 of CGTS Rules further directs to use open market value as value of supply.

Can Second person be treated as pure agent in the case?

Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Explanation.- For the purposes of this rule, the expression “pure agent” means a person who-

(a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;

(c) does not use for his own interest such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

The highlighted conditions aren’t met is the case to extend the advantage of Pure agent of non taxability as the second party intends to hold title of property in future.

GST rate

Effective rate of GST payable on Purchase of under construction residence or commercial properties from a builder involving transfer of interest in land or individual share of land to the buyer is 12% with full Input Tax Credit (ITC). (GST payable @ 18% on 2/3rd of the amount for the property; 1/3^rd of the amount having been deemed as value of land or undivided share of land supplied to the buyer.)

Consideration, which doesn’t constitute transfer in land or undivided share of land as part of consideration, such as construction services provided by a sub-contractor to the builder, attracts GST at the standard rate of 18% with full ITC.

Conclusion

Considering the wide definition of “supply“ as stated above, the transaction would be subject to GST for the consideration agreed @ 12%.

CA Saurabh Gupta

GST on Underwriting